In the world of mortgage refinances, there are people that refinance once over the life of their loan, there are those that refinance a number of times, and there are those that look to refinance ten years into the mortgage. Refinancing can be a great way to save money on your mortgage, which is why people do it over and over and why they refinance after ten years. However, sometimes you refinance and it looks good on paper, but the final result isn’t near as beneficial as you hoped.
Penalties, Fees, and Closing Costs
When you refinance a mortgage, you will have to pay all of the costs that come with refinancing. Most of the time these costs aren’t enough to offset the benefits of the refinance, but there are cases where the up-front fees dramatically impact the end result of the new loan. The idea behind a refinance is to alter the terms of a loan, so they are easier for you to handle, or so you save money by the time the loan is paid off. But after you calculate the closing costs and all of the up-front costs, you’ll find that the refinance will take a few thousand dollars before you can even get it approved. This is normal and perfectly fine. However, there are a couple of things you should remember when calculating the costs.
First of all, your refinance will cost you money. Second, those costs are going to have a break-even point. This is the point at which the refinance starts saving you money. Sometimes this will happen in less than a year, sometimes it takes a couple of years. If they break-even point is way in the distance, four or five years, you may not want to go through with the refinance. A lot can happen in that time frame and there is a good chance you’ll never recoup those losses.
Penalties also need to be considered. Many lenders put a prepayment penalty on their loans. If you pay the loan off before a designated time, you will pay the prepayment penalty. This comes into play whether you pay the loan off or whether you refinance because in both scenarios, the original lender no longer owns the loan. Prepayment penalties can be a huge expense that often offset the financial benefit of the refinance. If you have a prepayment penalty, you may want to reconsider the refinance.
Don’t Refinance a Mortgage After Ten Years
A common mistake made by homeowners is to refinance their home to a lower rate after they’ve owned the original loan for many years. This scenario may look good on paper,but there is one factor that will affect whether or not you benefit from this. That factor is the amortization schedule. Interest amortizes in such a way that you pay more interest in the first few years of the loan than you do near the end. So for five years or so, you’re paying a lot of interest and very little principal. After that, the principal begins to be impacted and you start seeing the mortgage amount drop. When you refinance, the amortization schedule starts over and you’re back to square one. Even if you have a lower mortgage amount and lower interest rate when you start overpaying more on interest than the principal, you end up paying far more than it would seem. So be very careful when refinancing after you’ve owned the loan for a long time. There are ways to do this where you can save money, but you need to make sure you are crunching all of the numbers and working with a good loan officer who can make sure you are saving money with the refinance.
There are ways to save money when you refinance a mortgage and there are ways to lose money on the refinance. These scenarios mentioned are common pitfalls. That doesn’t mean you can’t save money on a refinance, but it does mean that you need to be extra cautious and you need to keep yourself very well informed. Again, a reliable loan officer will be extremely helpful if you choose to refinance.